As major urban areas strain to adequately support rapidly growing populations, the need for infrastructure is at an all-time high, a development so pivotal that it is pressuring the engineering and construction industry to step up as never before to meet the challenge, and putting their efficiency and risk management processes to the test, according to KPMG International’s Global Construction Survey 2012.
The Great Global Infrastructure Opportunity surveyed 161 engineering and construction companies around the world with revenues ranging from US$ 250 million to more than US$5 billion.
“With increased scale comes complexity as global industry players navigate a tough political, commercial, regulatory and governance environment which will test their risk management ability to the maximum extent,” said Geno Armstrong, KPMG’s International Sector Leader, Engineering and Construction and a partner in the US firm.
Just over 40 percent of respondents globally anticipate that the energy sector offers the greatest opportunity for revenue in the next 12 months. Second behind energy were roads/bridges tied with residential at 24 percent, followed by rail and mining.
Nearly 60 percent of respondents from the Americas believe the energy sector will have the biggest impact on revenues, followed by retail projects. Respondents from Asia Pacific and Europe, Middle East and Africa (EMEA) also see energy as their biggest revenue producers. In Asia, respondents see the second biggest revenue opportunity in the industrial sector, while in EMEA, roads/bridges ranked second.
“The demand for firms and individuals with sector-specific engineering and construction skills will rise as [power] projects proliferate around the globe,” said Peter Kiss, KPMG’s Global Head of Power and Utilities and a partner in the Hungarian firm. “This should prove to be a major source of income for the industry as a whole.”
While 49 percent of respondents expect their backlogs will grow from 5 percent to over 15 percent in the next year, 71 percent of respondents cite economic uncertainty as their biggest ongoing concern followed by a skills shortage (31 percent) and thirdly, government deficits (30 percent). Sixty-two percent said that they expect margins on current bids to remain unchanged from their current backlog.
Fifty-seven percent said their revenues in 2011 increased from 2010, with the Asia Pacific region seeing the greatest growth (72 percent) followed by EMEA (53 percent) and then, the Americas (41 percent).
Creating Efficiencies to Manage Complexity and Meet Demand
To mitigate risk, manage project complexity and effectively meet the anticipated increase in demand, companies are seeking solutions to address efficiencies in their procurement /supply chain. Nearly 60 percent of respondents say improvement in this area will improve profits and enhance cash flows. Almost 40 percent of respondents say the primary cause of inefficiencies in their supply chains were disparate processes and systems.
Cost cutting still remains a challenge for companies as well, with organizational culture seen to be culprit for implementing the cuts for 61 percent of respondents globally, and 78 percent in the Americas. And a surprising 17 percent of respondents globally said that cost reduction was not a priority at all.
Survey respondents acknowledge that IT optimization is critical to improving efficiencies, yet 50 percent say that overhauling IT systems takes too long and costs dearly. Others (30 percent) say that there are not enough available ERP packages available that are tailored to the construction sector.
“IT investment doesn’t come cheap,” said Douglas Gates, Principle, KPMG in the United States, Advisory practice. “Nevertheless those brave enough to fund major IT enhancements are now reaping the rewards of great centralization and transparency across their supply chains.”
Risk Management Still a Major Concern
With projects anticipated to become more complex, maintaining margins and mitigating risk are major concerns for most respondents. Globally, 45 percent of respondents say that quantifying risks is the chief concern; in the Americas, 52 percent of respondents say that identifying risk is the main focus and nearly 50 percent said they want to understand the link between strategy and risk.
“Despite considerable investment, risk management still comes up a bit short,” Mr. Armstrong said. “Our survey revealed that nearly 54 percent of respondents said they failed to identify upfront issues that later caused margin erosion and only 36 percent believe that their project review processes are very efficient.”
Barriers to Investment
What respondents say may be the primary barriers to public-private partnerships in infrastructure investment is a perceived lack of policies, leadership and investment by the public sector as well as a lack of initiative in the private sector.
Less than half (47 percent)of respondents believe government policies will have a positive impact on investment, which is roughly equal across all three regions, with Asia Pacific being the most positive (49 percent) followed by EMEA (47 percent) and the Americas (41 percent).
Moreover, respondents showed concern about the public sector’s ability to drive infrastructure investment with 80 percent of respondents globally saying that lack of leadership will hamper investment.
And while respondents globally anticipate that energy (34 percent) followed by transportation (33 percent) will likely attract the most private sector investment for their companies, two-thirds see a lack of private sector initiative as another barrier to investment. Fifty-six percent of the America respondents see transportation as having the biggest appeal for investment.
“With austerity policies in many countries constraining the scope for public sector spending, it is vital to create an environment that encourages private sector investment,” Mr. Armstrong said.
Commenting further on infrastructure investment, Nick Chism, KPMG Global Head of Infrastructure said: “As governments around the world seek to create 21st century infrastructure, they need to create an environment that encourages private sector investment. This means addressing regulatory and legislative barriers and showing the kind of long-term will that transcends immediate political popularity.”
About the Survey
All survey responses for KPMG’s 2012 Global Construction Survey: The Great Global Infrastructure Opportunity were gathered through face-to-face interviews in 2011 with 161 senior leaders – many of them Chief Executive Officers – from leading engineering and construction companies in 27 countries around the world. Fifty-two percent of respondents were from EMEA, 31 percent from the Americas and 17 percent from the Asia-Pacific region. Respondent companies’ turnover ranged from less than US$250 million to more than US$5 billion, with a mix of operations from global through regional to purely domestic. The interviews were carried out by senior representatives from KPMG member firms specializing in the engineering and construction industry, with the questions reflecting current and ongoing concerns expressed by clients of KPMG member firms.
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About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 152 countries and have 145,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.